Most parents will do
just about anything for their children, especially when it comes to education.
Predictably, at a time when college costs are exploding and students are
staggering under more than $1 trillion in debt, one opportunistic lender is making
huge profits on loans to their doting moms and dads.

Less predictably, that
lender is the United States government.

The
fast-growing federal program known as Parent PLUS now serves 3.2 million
borrowers, who have racked up $65 billion in debt helping their kids go to
school. The loans have much in common with the regular student loans that have
created a national debt crisis and a 2016 campaign issue, but PLUS has much
higher interest rates and fees, and far fewer opportunities for loan
forgiveness or reductions.

In
fact, the PLUS program, which includes similar loans to graduate students, is
the most profitable of the 120 or so federal lending programs. That sounds like
a good thing, until you remember the government’s profit comes from its own citizens,
often citizens of modest means.

Parent
PLUS was created in 1980 to provide small loans to help reasonably well-off
families finance the American Dream of an undergraduate education. But in an
era of skyrocketing education costs, it has grown to look a lot like publicly
funded predatory lending, providing almost any borrowers with almost unlimited
cash to attend any school with almost no regard to their ability to repay.
Thirteen percent of undergraduates now rely on Parent PLUS, and many of their
parents are falling into debt traps.

“You feel so guilty that
you haven’t done enough for your kid, and they make it so easy to get the
loans,” said Elizabeth Hill, a 57-year-old property appraiser from the Boston
suburbs with more than $30,000 in PLUS debt. “Then they’ve got you by
the cojones. It’s like ‘The Sopranos,’ except it’s the government.”

For
all the controversy swirling around student loans, lending money directly to
students at least has a “human capital” rationale,since recipients pursue degrees that can boost their earning power
and help them fulfill their obligations. But
when parents borrow,
they’re often taking on new debts just as their earning power is starting to
dwindle. They’re not building human capital. They’re just getting closer to retirement, mortgaging their futures on behalf of their
children.Andif
they default, the government can garnish their wages and even their Social
Security checks — less brutal than “The Sopranos,” but just as effective.

According
to the White House budget office, the expected recovery rate for defaulted
Parent PLUS loans is a remarkable 106 percent, a testament to Uncle Sam’s
unique power as a collection agency. Overall, the program is expected to return
$1.23 on every dollar it lends this year, thanks to its relatively high
interest rates and minimal opportunities for debt relief, as well as the
government’s relentlessness in tracking down overdue education loans. The only
federal loans that generate slightly better returns are the similar PLUS loans
to graduate students, which have much lower default rates.

POLITICO has been
investigating thegovernment’sbizarre $3.3 trillion loan portfolio, which is riddled with tensions between the interests of
borrowers and taxpayers. Some credit programs are almost comically risky for
the government, most memorably a rural broadband effort with an official
default rate of a seemingly impossible 116 percent. Parent PLUS loans are the
flip side of the coin, generating reliable profits fortaxpayers butserious
risks for moderate-income borrowers.

Just about everyone I
interviewed thought Congress should consider major reforms
to Parent PLUS when it takes up a higher education bill thisfall, butno one was
too optimistic that reforms would pass,largely because of those profits.

“Parent PLUS is
classic predatory lending. It’s not a safe product for many of these families,
and the debts will hound them forever,” said Rachel Fishman, an education
policy analyst at the nonpartisan New America think tank. “But it’s a cash cow
for the government, so it’s going to be extremely difficult to reform.”

Parent PLUS is
not a trap for everyone. The latest data suggest that only 5 percent of
borrowers are defaulting within their first three years of repayment, although
that figure is rising rapidly. TheWhite House budget tablessuggest the expected default
rate over the course of the loans is well above 10 percent, which is still well
below the rate for regular student loans. There’s a wealth of evidence that
college degrees boost lifetime earnings, and defenders of Parent PLUS say it’s
an important tool for increasing college graduation rates. PLUS loans have also
become a key revenue source for many schools, particularly historically black
colleges and for-profits that tend to serve lower-income families.

But
that just illustrates the increasingly tortured economic paradoxes at the heart
of modern higher education, where schools have no incentive to provide
affordable prices as long as they can count on federal dollars for
making education affordable.Ultimately,
Parent PLUS sluices more cash into the college-industrial complex,
helping educators jack up their tuitions while pressuring parents to make up
the difference with debt, while doing nothing to ensure they’re getting a real
return on their investment. It enhances accessibility, but not really
affordability, simply giving parents a way to punt the skyrocketing
costs into the future.Even some advocates who fiercely defended
Parent PLUS during a high-profile controversy in 2011,when the Obama administration briefly
reined in loans to parents with sketchy credit histories, told me the
program is deeply troubled and inherently flawed.

When
I spoke to White House education adviser Roberto Rodriguez about this
conundrum, he emphasized that President Barack Obama has crusaded to make
America the world’s leader in access to higher education, expanding Pell
grants to low-income students and “income-based repayment” for burdensome
student loans, while proposing to make community college free. Parent PLUS, he
said, is another important tool to help young people pursue a better life. But
he also said he's concerned that too many struggling parents are getting
in too deep. When I asked him if the Education Department was running a
predatory lending program, he didn’t say no.

“That’s the heart of the
matter,” Rodriguez said. “You want to expand access and choice, but you also
want to make sure families can afford these loans.”

HILL AND HER husband are solidly middle
class and proudly thrifty; she drives a 15-year-old minivan and shops at TJ
Maxx. She and her husband put away money for their son Aaron’s education, and
though they burned through some savings when Hill lost her job early in the
Great Recession, they figured they’d be fine when Aaron chose the University of
Massachusetts at Amherst over several private colleges. He also won some academic
grants and maxed out on federal student loans. But even a public school like
UMass cost $25,000 a year.Hill just couldn’t make the numbers work.

Until, suddenly, she could. Hill discovered she was
eligible for Parent PLUS, which would cover whatever Aaron’s grants
and loans didn’t. At the time, Hill felt like she had won something, even
though the loans are entitlements for anyone without a recent history of
“adverse credit.” She feels differently now that Aaron has moved back home with
his degree and taken a job at a local liquor store — and her husband may have to
postpone his plans for retirement to make ends meet.

“You’re at your wits’ end,
you want to help your kid, and this fairy princess appears on your computer and
says: ‘Want some money?’” Hill recalled. “You’re like: Bingo! It’s more than
you can afford, but dammit, education is important, right? Then four years
later, you can’t believe how much you owe.”

When
Congress created Parent PLUS 35 years ago, the loans were capped at $3,000 per
year, until that was lifted in 1992 so families could borrow as much as they
wanted toward the cost of attendance at any public or private school. But the
rules do not allow colleges to ask about their income or their ability to pay.
And the borrowers don’t have to start making payments until the student leaves
school, although the interest accumulates the whole time.

Congress
set the maximum interest rate at 9 percent in 1980, which seemed generous at a
time when mortgage rates were skyrocketing toward 18 percent, but Parent PLUS
is no longer a particularly attractive deal for families with other options.
The current rates are about 7 percent plus a 4 percent origination
fee, a lot lower than credit card debt or payday loans, but a lot higher than
subsidized student loans.

“I figured the rate wasn’t
terrible, and the money was so easy to get,” said Debbie Hounanian, a
56-year-old office manager in the Los Angeles suburbs who racked up $54,000
in Parent PLUS debt. “I had no idea what I was getting into.”

As student debt has drawn protests and political attention, the government's lending to their parents has quietly grown into a dangerous burden. | AP Photo | As student debt has drawn protests and political attention, the government's lending to their parents has quietly grown into a dangerous burden. | AP Photo | AP Photo

Today, the
average Parent PLUS loan is about $13,000, and many parents
pile up much larger debts now that some schools cost more than $50,000 a
year. The loans are almost impossible to discharge in bankruptcy, just like
student loans, but they’re ineligible for most of the income-based
payment relief available for student loans. Consumer advocates compare
them to subprime mortgages before the bust, encouraging families to bite off
more debt than they can chew — except that Parent PLUS also
has a government imprimatur.

Toby Merrill, who runs a
Harvard-affiliated legal services clinic that focuses on predatory lending,
recalls one ready-to-retire borrower who contacted her after running up
$150,000 in PLUS debt on three children.

“The question was: What
are my options?” Merrill said. “It was sad, because the answer was: You don’t
really have options.”

AS STATE AID for higher
education has plunged while the cost of college has escalated, PLUS loans
have become an increasingly routine method of filling the gap, with about
700,000 new loans every year. Some schools actually include PLUS in
their financial aid offers, telling parents they’ve qualified to take out,
say, $20,000 in PLUS loans, a rather disingenuous way of saying the
actual offer will leave them $20,000 short of the school's official cost of
attendance. Colleges with tight budgets have little incentive to tell students
they can’t afford to enroll, and strong incentives to encourage students to
load up on PLUS loans that pass directly into their coffers. The
president of Albany State University in Georgia even admitted at a public
hearing that cash-strapped colleges have been steering students from student
loans into more onerous and expensive Parent PLUS loans, because
they’re required to report default rates for student loans but not
for Parent PLUS.

The
2011 controversy over Parent PLUS, when the Obama administration temporarily
tightened the program’s lax vetting process, illuminated the extent to which
colleges and families have become dependent on the cash.It erupted after the Education Department’s financial aid office
finally recognized a longstanding absurdity: the “adverse credit” reviews
for PLUS applicants were flagging some delinquent debts, but not
debts that were so delinquent they had been sent to collection agencies or
written off. As a result, many applicants were getting loans with worse credit
than rejected applicants.

“It made no sense,” said
Ben Miller, who was a senior policy adviser at the department during
the PLUS flap and is now director of post-secondary education at the
left-leaning Center for American Progress. “But fixing the problem had a much
bigger impact than anyone realized it would.”

Quietly, the department
started counting more bad debts in its credit
reviews — and PLUS rejection rates soared. Studentswho couldn’t renew their loans begandropping out of school. And schools
that relied heavily on PLUS revenue began hemorrhaging cash. At
historically black colleges and universities, which had been particularly
hard-hit by the recession, the number of PLUS recipients dropped 45
percent over the next two years, depriving them of an estimated $150 million.
Three struggling black colleges—in Virginia, Georgia, and North Carolina — ended
up shutting their doors, and larger schools like Morehouse endured mass
layoffs.

“Our schools were
screaming bloody murder,” said Thurgood Marshall College Fund President Johnny C. Taylor Jr., a leading advocate for historically black colleges and
universities. “Forget salt — this was pouring acid in our wounds.”

For-profit schools
absorbed an even bigger hit, a 54 percent decline in PLUS enrollment. But
for obvious political reasons, the black schools (with fierce support from the
Congressional Black Caucus) led the fight to get the first African-American
president to reverse or at least delay the changes. Taylor and other advocates
had several tense meetings with Education Secretary Arne Duncan, repeatedly
asking why a two-decade-old snafu had to be corrected immediately, why the
tougher reviews couldn’t be limited to new PLUS applicants, why a
secretary who had said expanding access to college would be his “North Star”
was restricting access to college. Duncan emphasized that the changes weren’t
directed at black schools, but Taylor shot back that they were having a
disproportionate effect on black schools.

“The secretary kept
saying: My lawyers are telling us to do this; we’re doing our best to work it
out,” Taylor said. “Give me a break! We were trying to revive a community with
double the unemployment rate of the majority community.”

Eventually, Duncan
publicly apologized to black college leaders for the abruptness of the changes,
acknowledging that “communication internally and externally was poor.” He
promised to consider appeals from all rejected PLUS applicants, and
launched a process to write new PLUS credit rules.

“It was an operational
screw-up of epic proportions,” said Justin Draeger, president of the National
Association of Student Financial Aid Administrators. “But it was a pretty good
reminder that Parent PLUS helps a lot of people pay for
college.”

In 2014, the department
announced the new PLUS rules, essentially reversing its efforts to
tighten credit checks. Bad debts are no longer grounds for rejection if they’re
less than $2,085 (versus $500 in the old rule) or less than two years old
(versus five years). The department didn’t even require loan counseling for
all PLUS borrowers, just those who managed to get loans despite
adverse credit.

“It’s a shame.
Most parents would be better off taking a second mortgage,” said Natalia
Abrams, director of the advocacy group Student Debt Crisis. “Instead, they’re
getting trapped. They assume that if the government is offering these loans,
they must be safe.”

To my surprise, Taylor told
me he agrees. Taylor was probably the most outspoken critic of the
administration’s short-lived efforts to rein in Parent PLUS, and he
still believes it was unfair to change the rules so suddenly after a brutal
downturn. But he asked me not to describe him as
a Parent PLUS defender. He said the program is so exploitative
that he once investigated a class-action lawsuit, but found that
debt-ravaged parents were too ashamed to go public.

“It’s a horrible
program, totally out of control,” he said. “We’ve got to figure out a way to
make college affordable, but Parent PLUS is definitely not the
answer.”

So what’s the answer?

OBAMA'S NEW CONSUMER Financial Protection Bureau has raised alarms about predatory lending by
bankers and mortgage brokers. At a recent event, Richard Hunt, the president of
the Consumer Bankers Association, posed a question to CFPB Director Richard
Cordray: “Why aren’t you doing anything about Parent PLUS?” Cordray
replied that he didn’t have jurisdiction over the federal government, but Hunt
believes that if one of his members offered a similar loan product with
similarly negligible underwriting standards, the bureau would be all over it.

“The silence has been
deafening,” Hunt said. “It’s sinister to see the government throw money at
people with no clue if they can pay it back.”

Hunt would like to see the
private sector — that is, his members — take over the business. And some
private lenders are starting to compete with Parent PLUS — one Rhode Island
bank is offering a similar product with a much lower interest rate of 3 percent
and no origination fees for the most creditworthy borrowers. But
while PLUS loans don’t have the same protections as federal student
loans, they do include some options most private banks won’t match, like the
ability to defer payments for years.

What PLUS lacks
is flexibility. Parents who qualify can borrow whatever they need for
their kids to attend whatever school they want, while parents who get
rejected can’t borrow a dime. In another hearing, an administrator of a
North Carolina college shared a sad vignette about a homeless woman who
was denied a PLUS loan, implicitly suggesting the government should
have extended her virtually unlimited credit. In fact, that’s exactly what
would have happened if her credit had been clean. Nobody would have been
allowed to try to gauge whether her income or assets gave her any hope of
repayment. Parent PLUS suffers from a paradox that also afflicts
government loans for agriculture, shipbuilding and just about everything else:
It’s highly risky for borrowers who need itmostdesperately, whiletheborrowers whocould most easily handle the debtcould
probably get by without it.

Many critics argue
that Parent PLUS should be abolished, and that the government
should expand Pell grants and raise caps on student loans instead. But even
those who want to continue the program — including Rodriguez in the White House
and Republican staffers on Capitol Hill — seem to agree there are
relatively obvious ways to strengthen it. The most evident would be
real underwriting standards to evaluate the ability to pay of potential
borrowers. Another would be strict loan caps. Or a combination of those reforms
could link the creditworthiness of borrowers to the size of the loans they’re
eligible to receive, thekind of calculation real banks make.Even Draeger, who represents aid
administrators at 3,000 colleges and universities, said the system needs
structural changes to protect vulnerable families.

“We definitely support new
underwriting standards. Parents are getting in too deep, and it’s
affecting their ability to retire and enjoy life,” he said. “Right now, schools
just have to follow the rules, and from a consumer protection standpoint, the
rules are dangerous.”

The major obstacle to reform,
beyond Washington’s general dysfunction and polarization, is the immense
profitability of Parent PLUS.These days, the government borrows money at
almost no cost, so lending at 7 percent plus fees can add up: Parent PLUS could
reduce the deficit by $3 billion this year.That means any effort to scale it back
and restrict it to creditworthy borrowers would cost the governmenta lot of money. Politicians generally don’t like paying more
money to provide fewer benefits, especially when a well-organized political
coalition has defended those benefits in the past.

“That’s the
perversity of a loan program like this,” one senior GOP aide said. “It makes it
that much harder to fix.”

In other words, Washington
has become as dependent on Parent PLUS loans as the schools that
flack them and the parents who receive them. The status quo
has tremendous power, because Congress likes profitable
programs, schools like reliable revenue, and parents like to help their
kids.

Hill and her husband have another son getting ready to start Ithaca
College, just as they’re starting to pay back Aaron’s loan, but they're
determined to help out again. They haven't figured out how they're going to do
that yet, because there's no way they're going back to the Parent PLUS well
again.

“Fool me once, right?”
Hill said. “I don’t want to put my kid in a bind, but these loans
are ridiculous. The guilt system only goes so far.”